The Basics
What Is a Home Equity Loan?
A home equity loan is a second mortgage that lets you borrow a lump sum against your home equity at a fixed interest rate. You receive the full amount at closing and repay it in equal monthly installments over a set term — typically 5 to 20 years. Your existing first mortgage stays completely intact.
It's sometimes called a "second mortgage" or "equity loan" — but all three terms refer to the same product. The defining characteristics are straightforward: fixed rate, fixed payment, lump sum disbursement. There's no draw period, no variable rate, and no payment surprises. What you see at closing is what you pay every month until it's done.
Fixed
Rate for the full term
85%
Typical max combined LTV
620+
Typical min. credit score
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Second lien — your first mortgage is untouched
Like a HELOC, a home equity loan sits in second lien position behind your existing mortgage. Your current rate, payment, and term on your first loan don't change at all. This is the key reason both home equity products are preferred when your existing mortgage has a below-market rate — there's no reason to disturb a 3% or 4% first mortgage to access equity.
Structure
How a Home Equity Loan Works
The structure is simple — simpler than a HELOC in many ways. You apply, get approved for a loan amount based on your equity and credit, close, and receive the full amount in a single deposit. From there, you make the same fixed payment every month until it's paid off.
At Closing
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Receive full loan amount as a lump sumWired to your account at or shortly after closing.
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Rate is locked — won't changeYour rate is fixed at closing for the entire loan term. No index, no margin, no movement.
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First payment due 30 days laterFull P&I from the first payment — no interest-only period.
During Repayment
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Same payment every monthPrincipal and interest. Amount never changes for the life of the loan.
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No additional drawsUnlike a HELOC, you can't pull more funds once the loan closes. It's a one-time disbursement.
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Pay off early any timeNo prepayment penalty on most home equity loans. Extra payments reduce principal directly.
Eligibility
Home Equity Loan Requirements
Qualification is based on credit, equity, income, and combined loan-to-value — the same framework as a HELOC, but for a fixed second mortgage instead of a revolving line.
RequirementTypical Standard
Credit Score
620+ (best rates at 700+)
Max CLTV
80–85% of appraised value
Min. Equity Required
15–20% remaining after loan
Max DTI
43–50% (varies by lender)
Income Documentation
Full doc — pay stubs, W-2s, tax returns
Appraisal
Required — establishes current value
Loan Terms Available
5, 10, 15, or 20 years (lender-specific)
Rate Type
Fixed for full term
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CLTV calculation example
Home value: $400,000. First mortgage balance: $250,000. Max CLTV at 85%: $340,000. Maximum home equity loan: $340,000 − $250,000 = $90,000. The higher your equity and the lower your first mortgage balance, the more you can borrow.
Payment Examples
Home Equity Loan Payment Examples
Payment depends on loan amount, rate, and term. Here's what monthly P&I looks like across common amounts and term lengths at an 8.5% illustrative rate.
Loan Amount10-yr term15-yr term20-yr term
Principal & interest only at 8.5% illustrative rate. Your actual rate depends on credit score, CLTV, and lender. Contact Bayou Mortgage for current rates.
📈 Example: $75,000 Home Equity Loan at 8.5%, 15 years
Monthly payment$738
Total payments over 15 years$132,840
Total interest paid$57,840
First mortgage — unchangedYour existing rate and payment
Comparison
Home Equity Loan vs. HELOC
Both are second mortgages secured by home equity — but the delivery mechanism and rate structure are very different. See the full HELOC guide →
| Factor | Home Equity Loan | HELOC |
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| Funds Delivery | Lump sum at closing | Revolving line — draw as needed |
| Interest Rate | Fixed for full term | Variable — tied to Prime |
| Monthly Payment | Fixed P&I from day one | Interest only during draw period |
| Rate Risk | None — locked at closing | Yes — rises if Prime rises |
| Flexibility | Lower — one-time disbursement | Higher — draw, repay, redraw |
| Best For | One-time large expense, rate certainty | Ongoing projects, staged needs |
vs. Cash-Out Refi
Home Equity Loan vs. Cash-Out Refinance
Both give you a lump sum — but a cash-out refi replaces your entire mortgage while a home equity loan sits behind it. The right choice depends heavily on your existing rate. See the full cash-out refinance guide →
Choose Home Equity Loan When...
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Your existing mortgage rate is lowNo reason to touch a 3–4% first mortgage. The home equity loan sits behind it and preserves your rate.
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You want fixed rate certainty without replacing your first loanFixed rate, fixed payment — without the rate risk of a HELOC or the full refi complexity of cash-out.
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The loan amount is modest relative to your total balanceIf you need $50,000 and have a $400,000 first mortgage, a full cash-out refi just to access $50k may not be worth the cost.
Choose Cash-Out Refi When...
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You can lower your first mortgage rate at the same timeIf today's rates are near or below your existing rate, a cash-out refi can lower your rate and pull cash simultaneously.
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You want one loan, one payment, one servicerA cash-out refi rolls everything into a single mortgage. Simpler to manage long-term.
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You need a very large amount relative to the property valueCash-out refis can go to 80% LTV on the full property value — sometimes producing larger proceeds than a second mortgage at 85% CLTV.
Not Sure Which Equity Option Fits?
Bayou Mortgage will compare home equity loan, HELOC, and cash-out refinance for your specific situation — showing total cost, monthly payment, and which makes the most sense given your existing rate.
Common Questions
Home Equity Loan FAQ
What's the difference between a home equity loan and a second mortgage? +
They're the same thing. A home equity loan is a type of second mortgage — it's secured by your home, sits behind the first mortgage in lien priority, and uses home equity as collateral. The term "second mortgage" is sometimes used interchangeably with both home equity loans and HELOCs, since both are second liens. When most people say "second mortgage," they typically mean a fixed-rate home equity loan.
Is a home equity loan rate higher than my first mortgage? +
Almost always, yes. Home equity loans are priced higher than first mortgages because they're second liens — in a foreclosure, the first mortgage holder is paid first, leaving second lien holders with more risk. Typical home equity loan rates run 1–3% above comparable first mortgage rates. However, they're still significantly lower than credit cards, personal loans, or most business financing — which is why using home equity for debt consolidation or large purchases can make strong financial sense.
Can I get a home equity loan if I already have a HELOC? +
It depends on your CLTV. If you already have a HELOC, that line is already counted as a second lien — even if you haven't drawn any funds. Adding a home equity loan on top would create a third lien, which most traditional lenders won't do. However, if you haven't drawn your HELOC and want to convert to a fixed-rate structure, closing the HELOC and opening a home equity loan is a clean alternative.
How long does it take to close a home equity loan? +
Typically 2–5 weeks from application to funding. The process includes credit review, income verification, appraisal, and title work. Like a first mortgage, the home equity loan requires a 3-business-day right of rescission on primary residences after closing — meaning funds aren't disbursed until day 4. On investment properties, funds typically disburse at closing.
Can I pay off a home equity loan early? +
Yes — most home equity loans have no prepayment penalty. You can make extra payments toward the principal at any time, which reduces your balance and shortens the effective term. Some lenders charge a small early payoff fee if the loan is paid off within the first 2–3 years; this varies by lender and Bayou Mortgage will disclose any such terms clearly before you close.
What happens to my home equity loan if I sell the house? +
Both liens are paid from sale proceeds at closing — first mortgage first, then the home equity loan balance. The remaining equity after both payoffs is yours. You can't sell a property and transfer the home equity loan to the buyer; it must be paid off at closing.
Is home equity loan interest tax deductible? +
Potentially, under specific conditions. Interest on a home equity loan may be deductible if the funds are used to buy, build, or substantially improve the home that secures the loan — and if you itemize deductions rather than taking the standard deduction. Interest on funds used for other purposes (debt consolidation, vacations, etc.) is generally not deductible under current tax law. Consult a tax advisor for your specific situation.
